Published — February 7, 2021
The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.
Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
Read also: LETTERS OF CREDIT
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The Applicant/Buyer/Importer/Account Party procures the letter of credit and purchases the goods.
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The Issuing Bank, whether a paying bank or not, issues the Letter of Credit and undertakes to pay the seller upon receipt of the draft and proper documents of title from the seller.
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Beneficiary/Seller/Exporter is one in whose favor the instrument is executed.
A letter of credit generally arises out of a separate contract requiring the assurance of payment of a third party. In a transaction involving a letter of credit, there are usually three transactions and three parties.
Who are the parties to the Letter of Credit?
In the Hongkong & Shanghai Banking Corporation, Limited, vs. National Steel Corporation and Citytrust Banking Corporation (Now Bank of The Philippine Islands) (G.R. No. 183486, February 24, 2016) the Court explained that:
The first transaction in a letter of credit is a contract of sale between the buyer and the seller. The contract may require that the buyer obtain a letter of credit from a third party acceptable to the seller. The obligations of the parties under this contract are governed by our law on sales.
The second transaction is the issuance of a letter of credit between the buyer and the issuing bank. The buyer requests the issuing bank to issue a letter of credit naming the seller as the beneficiary. In this transaction, the issuing bank undertakes to pay the seller upon presentation of the documents identified in the letter of credit. The buyer, on the other hand, obliges himself or herself to reimburse the issuing bank for the payment made. In addition, this transaction may also include a fee for the issuing bank’s services. This transaction constitutes an obligation on the part of the issuing bank to perform a service in consideration of the buyer’s payment.
The third transaction takes place between the seller and the issuing bank. The issuing bank issues the letter of credit for the benefit of the seller. The seller may agree to ship the goods to the buyer even before actual payment provided that the issuing bank informs him or her that a letter of credit has been issued for his or her benefit. This means that the seller can draw drafts from the issuing bank upon presentation of certain documents identified in the letter of credit.
Thus, generally, in a letter of credit, the parties are as follows:
1. Applicant/Buyer/Importer/Account Party who procures the letter of credit and purchases the goods and obliges himself to reimburse the issuing bank upon receipt of the documents of title.
2. Issuing Bank, whether a paying bank or not, issues the Letter of Credit and undertakes to pay the seller upon receipt of the draft and proper documents of title from the seller and to surrender them to the buyer upon reimbursement. After due payment, the issuing bank is entitled to reimbursement as a matter of right. Reimbursement includes debiting the bank account of the applicant, if any.
3. Beneficiary/Seller/Exporter, one in whose favor the instrument is executed. One who delivers the documents of title and draft to the issuing bank to recover payment. He has a prestation to do under the main contract.
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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